The Trends At Allied Motion Technologies (NASDAQ:AMOT) That You Should Know About
Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Allied Motion Technologies (NASDAQ:AMOT) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Allied Motion Technologies is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.083 = US$24m ÷ (US$344m - US$52m) (Based on the trailing twelve months to September 2020).
So, Allied Motion Technologies has an ROCE of 8.3%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.3%.
See our latest analysis for Allied Motion Technologies
Above you can see how the current ROCE for Allied Motion Technologies compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Allied Motion Technologies.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Allied Motion Technologies doesn't inspire confidence. Over the last five years, returns on capital have decreased to 8.3% from 19% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line On Allied Motion Technologies' ROCE
Bringing it all together, while we're somewhat encouraged by Allied Motion Technologies' reinvestment in its own business, we're aware that returns are shrinking. Yet to long term shareholders the stock has gifted them an incredible 169% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
On a separate note, we've found 2 warning signs for Allied Motion Technologies you'll probably want to know about.
While Allied Motion Technologies isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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